Currency as Debt: A New Theory of Money
A Practical Application of the Concept of Virtual Wealth
Part 4 of 7
 

Frederick Soddy, 1921 Nobel Laureate in chemistry turned student of economics, recognizing this currency shortfall, proposed a solution based upon his concept of “virtual wealth.”[1] He reasoned that economic communities could issue—create—new currency by declaring some economic credit for the incremental difference between the production cost of a product and its higher retail market value; in effect, a community dividend for increased productive capacity. Soddy realized that a stable economy, with supply and demand in balance, requires an increase in the quantity of currency in circulation to match increases in population and productivity.

In other words, a community could create and spend into circulation new currency in sufficient quantity to absorb changes caused by increases in population and in productivity, eliminating currency shortfalls and thereby actually increase the real wealth of the community.

Soddy placed virtual wealth, the sum of all goods and services available for sale in a free market, in the historical domain. It was this “quantity of goods that the community abstains from possessing” that was definite. Soddy saw virtual wealth, that is, existing goods and services that people would rather sell than consume or hold as wealth, as determining the purchasing power of the available currency, whatever the quantity of that currency might be, and not currency determining the value of the aggregate wealth.

Following Soddy’s reasoning, all people who use banks to gain easy access to society’s virtual wealth through commercial debt paper instruments, are subject to the criticism of acquiring unearned wealth. People advocating this view see the wealthy elite, who own and make majority use of the nation’s financial institutions, as parasites preying upon the poor working classes.

As a remedy to that criticism, Soddy would have supported:

1. 100% reserve requirements for banks.
2. Government issuance and control of the quantity of currency for the public good.
3. A cost-price index to enable the regulation the volume/rate of currency circulation by measuring its purchasing power.
4. Repudiation of a gold or silver standard as an exchange value regulator.
5. Replacing substantial sums of bank-issued credit with new currency issued by the government to cancel an equivalent amount of national debt.
6. Tax policies to prevent perpetual debt resulting from finite capital investments.

1 Soddy admittedly was a socialist, but more importantly he was a scientist and mathematician; and he certainly stepped out of the box to derive proper definitions of wealth and money (currency), providing him the basis for his analysis. That Soddy was a socialist need not mean his theory of virtual wealth is incorrect; indeed his theory was empirically derived, not assumed a priori. Consider too, that George Orwell was a socialist, yet few liberty-minded people mock his timeless 1984. As a wise man once quipped, even a blind hog occasionally finds an acorn. Soddy’s theory has been ignored largely because of Soddy’s political beliefs and Soddy’s bluntness to call “a spade a spade” with respect to the economic intelligentsia.